People, who make voluntary NPS contributions, get extra benefits up to Rs 50,000 over and above the 80C limit of Rs 1,50,000 in a financial year.

To get additional tax benefits over and above the 80C limits, an employee may make additional voluntary contributions under the same PRAN through a POP.

Sanjeev Singh (name changed) was selected for the post of primary teacher in the UP State Education Department in 2003, but got his appointment – along with 400 more candidates – in 2004. They got agitated after missing the conventional pension system due to the waiting period and filed a case to get it restored. During the pendency of the case, mandatory deductions for the National Pension System or NPS (earlier New Pension Scheme) also got stayed.

With the final verdict against them, Singh – who is an avid investor – now wonders about the tax treatment of the mandatory NPS contributions and wants to know if he may get tax benefits under any Section other than the already exhausted 80C, as voluntary NPS contributors get extra benefits up to Rs 50,000 over and above the 80C limit of Rs 1,50,000 in a financial year.

Explaining the tax treatment of NPS, a Kolkata-based senior officer with Pay and Accounts Department of the Central Government (who didn’t wish to be named) said, “Mandatory NPS contributions of government employees come under the overall limit of Section 80C of the Income Tax Act only. To get additional tax benefits over and above the 80C limits, an employee may make additional voluntary contributions under the same PRAN through a POP.”

“Although there are news that the mandatory NPS contributions may be hiked to 14 per cent of the salary (i.e. Basic+DA) from 10 per cent, but we have not received any circular on it. So, we are deducting 10 per cent only,” he added.

There are three sections under the Income Tax Act that deal with NPS contributions –

Section 80CCD (1): Mandatory NPS contributions come under this Section, which comes under overall limits of Section 80C. While salaried employees contribute 10 per cent of their salary, self-employed persons are allowed to contribute up to 20 per cent of their gross income.

Section 80CCD (1B): Voluntary contributions come under this Section and the contributors are allowed to claim tax benefits up to Rs 50,000 in a financial year apart from the Section 80C limits.

Section 80CCD (2): Matching NPS contributions by the employers come under this Section, which is not part of Section 80C. This Section is not applicable to self-employed contributors.

As, apart from mandatory NPS contributions of employees, many other things, like life insurance premium, contributions to annuity schemes and ULIPs, investments in ELSS, PPF, Sukanya Samriddhi Yojana, 5-year time deposits, NSC along with repayment of home loan principal and tuition fees for up to two children, are crowding the Section 80C, government employees now wish to get tax benefits on (at least a part of) mandatory NPS contributions u/s 80CCD (1B) that voluntary contributors enjoy.